'There's light at the end of the economic tunnel': Deutsche Bank Chief Economist

Torsten Slok, Deutsche Bank Chief Economist, joins Yahoo Finance’s Alexis Christoforous, Brian Sozzi and Emily McCormick to discuss how the markets are faring amid the coronavirus outbreak.

Video Transcript

ALEXIS CHRISTOFOROUS: I want to welcome Torsten Slok now. He is chief economist at Deutsche Bank. Torsten, good morning to you. I hope that you are well. Thanks for being with us. You know there are some firms out there, well, at least one, JP Morgan Chase, believes that the worst is behind us when it comes to this market. Would you agree with that?

TORSTEN SLOK: I think that a very important way of trying to think about this is to try to split the discussion into anything that has to do with a virus and then anything that has to do with the economy. I know these things are not completely separable, but what has been going on in terms of support to the economy coming most importantly from fiscal policy but also very importantly from monetary policy is a very, very critical part of thinking about will we be able to build a bridge over the virus while the virus is still not quite under control yet. And the short answer to your question, Alexis, we do think that an impressive amount of stimulus has been provided, in particular for fiscal policy, but also for monetary policy in terms of keeping the system together.

So overall, it is clear that with last week behind us where we saw significant initiatives globally, now it's about implementation. And we are seeing a lot of headlines, including this morning about how will you implement loan guarantees? How will you give loans to small businesses? How long time will it take before money get into the hands of consumers? But the bottom line, from a macro perspective, is that we have seen an incredible willingness in particular from the Fed and the ECB but also from politicians to step up and confront the economic negative consequences.

So the answer to your question is that we do think that there is more light at the end of the economic tunnel at least than we've had for quite some time in the sense that we now have some support that's about to be implemented. That doesn't mean that the data will get better economically here and now. It may take a few months for some of the macro data to get better, but we do think that, at least for markets, should be focusing on is this being addressed. And we think that this was very strongly being addressed last week, and we think this is a very important note as we go into this week.

BRIAN SOZZI: Torsten, you know, the debate is already starting to change. A lot of the things that we are now implementing in the US-- social distancing, not traveling as much, more cleaning products-- these things are here to stay one year, two year, three years, even five years down the line. What does that mean for the US economic output going out over those next, let's say, three to five years?

TORSTEN SLOK: Yeah, so this is very important, Brian. I mean, the question, of course, is how scarred are consumers? How scarred companies? How scarred is the government in terms of what regulation they have and how they put rules and laws around how businesses and consumers should be working? I think the first response is that we will see GDP decline quite dramatically in the second quarter, but we will not see a similar rebound in the third quarter exactly for the reasons that you're mentioning that this is likely to take a longer time.

In other words, we're going to see a more muted rebound. And the more muted rebound is driven exactly by consumers need to save more, corporates probably also need to save more. So in that sense, savings levels need to be rebuilt in the private sector to make sure that we don't get a second wave. We need higher levels of cash on corporate balance sheets. Higher levels of cash, precautionary cash if you will, on consumer balances to make sure that we don't get into a second wave where people are caught off guard.

So you're right. We will not only need to see a rebuilding of savings balances in the private sector for both consumers and corporates, but we will also need to see what are the behavioral changes. Will people travel a lot less over the summer? Will we also see people go less to restaurants? Will we see people-- even domestic travel also decline, which, of course, will be muting the impact on GDP. That's why we and the consensus has a more flat rebound relative to how quickly we came down here over the last few weeks.

EMILY MCCORMICK: And, Torsten, to that point, do you feel that there are certain industries that are at risk of never actually fully recovering to the same levels pre-coronavirus outbreak simply because consumer habits change because of the way that they've had to deal with the social distancing measures that have been put in place? Do you feel that there are some changes that will stick completely and completely change society in that way?

TORSTEN SLOK: I do think we will see regime shift in the broader economy and, in particular, in some sectors. The challenge with your good question is, of course, that, well, at the same time we're now having a lot of government support, in particular to those industries that were specifically hard hit-- transportation, again, airlines, hotels. So the question is, how do I weigh up on my scale here?

Well, these industries are actually going to get a lot of support, which argues, of course, that they will do well. But at the same time, they will probably be structurally impaired in terms of demand going forward, so you're right. It's a difficult challenge, if you look at the sectors of the S&P 500, to exactly put up on the scale of which ones would see more permanent damage because those that are seeing a lot of damage at the moment will also be getting more government support, and therefore making it a little bit difficult to figure out the exact dynamics of what the profile will be looking like in terms of looking ahead for the next year or two.

ALEXIS CHRISTOFOROUS: And, Torsten, talk to us about the impact these low oil prices are having on the economy, especially when we do come out the other side and start to rebuild. Right now we have oil at a 17-year low. And there are some economists who were expecting it to go even lower. In fact, Goldman Sachs this morning predicting that West Texas could even go negative. What would the impact be to the overall economy?

TORSTEN SLOK: Yeah, so, I mean, as we discussed in 2016, I still stick to the line that it is very, very difficult to see lower oil prices as a net negative for the US economy. It's certainly not good for energy. It is certainly not good for a lot of parts of high yield where the energy sector is concentrated. So in that sense from a pure market perspective, it's creating some systemic risks, but those risks are now being dealt with by the Fed and being dealt by with a broad array of initiatives that have been taken to try to calm credit markets, to try to calm financial markets down.

So at the end of that very good question, Alexis, I still look at retail gas prices at the pump are now below $2 a gallon. I mean, that does provide a significant amount of support to consumers, so therefore-- and given the [INAUDIBLE] is 70% of GDP, we do still think that the net effect of oil prices, at least if you look at it over the next few quarters, will be a positive for the US economy. So in that sense, that's helpful. It's very small helpful, but it's helpful in this situation where American businesses broadly speaking are shut, where their doors are closed on so many small storefronts.

ALEXIS CHRISTOFOROUS: We'll leave it on that positive note then. Torsten Slok, chief economist at Deutsche Bank, thanks, as always, for being with us.